It could cost Equity Group #ticker:EQTY at least $170 million (Sh17.6 billion) to acquire DRC Congo’s second largest lender Banque Commerciale du Congo (BCDC) based on the price multiple of the lender’s previous DRC acquisition.
The Standard Investment Bank (SIB) estimate is based on BCDC’s book value at the end of 2018 and the price Equity paid to settle the 2015 deal when acquiring ProCredit Bank, another DRC bank.
SIB senior associate research analyst Martin Kirimi said given that BCDC is much stronger than ProCredit was at the time of its acquisition, the least amount of money Equity will part with is likely to be twice the net assets of the lender.
“We basically estimated the net assets as at 2018 and then used the two-times multiple (2x) that they bought ProCredit at. Mostly likely, BCDC will be higher than the 2x multiple and that is why we are projecting a minimum of $170m,” said Mr Kirimi.
BCDC, with 29 branches in DRC, had net assets of Sh7.5 billion at the end of 2017, as quoted in its annual report. This has been growing at an average of 10 per cent annually.
The transaction will be settled via cash, unlike Pro Credit Bank acquisition that took place through a share swap.
Mr Kirimi says BCDC, with a return on assets (RoE) above 11 per cent, is much stronger than the RoE that ProCredit had at the time of the share swap, pointing to a possibility that Equity will pay higher.
“Ideally, the price should be pegged on a higher multiple. ProCredit had a smaller RoE and was seventh in DRC. Now Equity is going for number two bank with decent RoE despite currency depreciation,” he added.
Equity’s subsidiary in DRC has experienced exponential growth, posting an average RoE of 15.2 per cent in 2018, up from 5.7 per cent in 2016. This has seen it overtake Uganda to become the most profitable regional subsidiary. SIB analysis say completion of the BCDC deal may however shrink Equity’s tier I capital adequacy ratio by about 300 basis points going by half year 2019 numbers.
“We however believe there will still be headroom to maintain the dividend at current levels. They should be able to cover that with the earnings for full year and also from the acquired entity,” SIB said.